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After a plunging in 2022, electric vehicle (EV) stocks are strongly rebounding in 2023. One such EV stock is XPeng Motors (XPEV), which is up 50% year to date (YTD) and 72% in just the past month. How high can the stock go as EV stocks continue to rally?
XPeng Motors' stock fell over 80% in 2022 and underperformed its EV peers. The company’s recent performance has been dismal with monthly deliveries falling below 10,000 in all six months of 2023.
To make things worse, China’s slower-than-expected economic recovery put pressure on Chinese stocks including XPeng Motors.
Why is XPeng Motors Stock Going Up?
However, XPeng Motors saw its stock skyrocket in June. The uptick came amid a broad-based rally in US markets in general and EV stocks in particular. Also, the sentiments towards Chinese EV stocks improved last month after China announced that it would extend its EV purchase tax exemption until 2027.
Last week, XPeng Motors announced the pricing for its G6 SUV and priced the model around 20% below the Tesla (TSLA) Model Y – which was the best-selling model globally in the first quarter of 2023. Given the price war in the EV industry, XPeng Motors' pricing G6 competitively would help it spur sales. The model is based on XPeng Motors’ Smart Electric Platform Architecture which it unveiled in April.
The company said that the new platform would help it lower vehicle costs. Controlling costs and offering competitively priced vehicles has become all the more important for EV companies amid the rising competition.
China is in fact the most competitive EV market globally, something with Tesla’s CEO Elon Musk has also admitted multiple times.
Elon Musk Believes a Chinese EV Company Might Rival Tesla
Musk went as far as saying that a Chinese company would be Tesla’s closest competitor. Incidentally, Chinese EV maker BYD (BYDDY) is already the biggest seller of new energy vehicles globally.
In 2011, Musk ridiculed the possibility of BYD being its competitor but the Berkshire Hathaway-backed company (BRK.B) has now raced ahead of Tesla in terms of total deliveries, thanks to its diverse portfolio of models.
That said, Musk has redefined the rules of the EV industry which is corroborated by auto industry heavyweights like Ford and General Motors co-opting for Tesla's charging standard.
The Investment Thesis for XPeng Motors: Is It a Good Buy?
While the company’s deliveries sagged in the first half of 2023, XPeng Motors it expects monthly deliveries to average 15,000 in the third quarter and 20,000 in the fourth quarter.
XPeng Motors has also expanded its operations to Europe and further international expansion would help it increase its deliveries. The company has shown some progress and its June deliveries rose 15% as compared to May. The deliveries of G6 are set to begin in July and are expected to help Xpeng Motors ramp up its sales.
Also, last month XPeng Motors received permission to expand its autonomous driving service to Beijing. The company already has permission to offer self-driving in Shenzhen, Shanghai, and Guangzhou, and is optimistic of expanding the service to all major Chinese cities by the end of 2024.
Self-Driving Is an Underappreciated Asset for XPeng Motors
Musk has said multiple times that most of Tesla’s valuation comes from its software business, especially its self-driving capabilities. He reiterated his views at the Paris VivaTech Innovation Conference in June and linked Tesla’s valuation to its autonomous driving business. Tesla stock has risen 128% in 2023 and is among the top five S&P 500 (SPY) gainers.
Tesla does not have permission to offer its self-driving service in Chinese cities as the country is concerned about spying and had even barred Tesla cars from some government and military installations over such fears.
Based in China, XPeng Motors also has bourgeoning autonomous driving technology and is therefore looks like an underappreciated asset. The company already offers advanced self-driving in multiple Chinese cities. While autonomous driving companies are currently posting losses and none of them currently offer L4 or fully autonomous cars, the industry holds long-term promise.
China is also encouraging autonomous driving and might support domestic companies that are working on self-driving cars.
XPeng Motors’ Valuation Looks Reasonable
Valuing EV companies can be tricky, as minus Tesla, all of them are posting losses and therefore cannot be valued based on traditional profitability and cash flow-based metrics. Also, while the autonomous driving segment might not contribute much to the earnings currently, it could be a key earnings and profitability driver in the future.
Musk for instance expects Tesla's full self-driving (FSD) price to rise to $100,000 over the long term. Last year, the company raised FSD price by 50% to $15,000.
XPeng Motors currently has a market cap of around $12 billion and at the end of March, it had around $5 billion in cash and cash equivalents on its balance sheet. Xpeng Motors stock currently trades at a price-to-sales multiple of 2.62x as compared to 10.02x for Tesla and 5.44x for Li Auto (LI).
Here it is worth noting that both Tesla and Li Auto (LI) have impressed markets with their recent performance and Li Auto delivered more cars in the first half of 2023 than it did in the whole of 2022. Tesla’s second-quarter deliveries were also ahead of analysts' estimates.
Xpeng Motors meanwhile disappointed markets with both its operating and financial performance over the last couple of quarters. That said, the second half could be better for the stock especially if it is able to meet the delivery guidance.
How High Can XPeng Motors Stock Go?
While Xpeng Motors rallied in June, the stock currently trades at less than a quarter of its 2020 highs. The highest target price for the stock is $27.87 which implies a gain of almost 100% over current prices. However the stock's mean target is $13.14 and the stock has a consensus rating of “hold” from the 10 analysts.
Even though the consensus from Wall Street Analysts is that the stock has gotten ahead of itself, I believe the outlook for XPeng Motors stock looks positive in the second half of the year though. With reasonable valuations and an underappreciated asset in self-driving, the risk-return trade-off looks favorable for the stock in the medium to long term, especially as global EV adoption continues to rise exponentially.
On the date of publication, Mohit Oberoi had a position in: XPEV , NIO . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
